On March 31, 2011, the U.S. Department of Health and Human Services (HHS) released the much-anticipated proposed regulations and guidance on Accountable Care Organizations (ACOs). The focus of the first 12 months following the passage of the Patient Protection and Affordable Care Act has been primarily on insurance market reforms; this release represents the first installment of regulations on the Medicare, Medicaid, and growth-trend reforms in the Act. The reforms are intended to generate substantial savings in federal expenditures over the next decade.

The deadline for submitting comments on the proposed rule for ACOs is June 6, 2011. Click here to review the 429 pages of preamble and regulations. The program is scheduled to take effect on January 1, 2012.

Under the Medicare Shared Savings Program, providers are offered a financial incentive to band together in an ACO with the shared goals of improving the quality of care provided to Medicare beneficiaries and coordinating care to achieve cost savings. If the ACO realizes savings in Medicare expenditures above an established expenditure benchmark, and meets or exceeds quality performance standards to be established by the Secretary of HHS, the ACO will be paid a share of Medicare’s savings. ACOs that do not meet the quality performance thresholds for all proposed measures are not eligible for shared savings, regardless of how much costs are reduced. Although not specifically provided for in the Act, the Secretary proposes public reporting of ACO cost and quality measures.

ACOs are required to enter into a three-year agreement with HHS that includes an estimated expenditure benchmark based on the per-beneficiary expenditures under Medicare parts A and B for the beneficiaries assigned to the ACO in the three years immediately prior to the agreement. HHS will assign Medicare beneficiaries to ACOs based on the beneficiaries’ previous utilization of primary care physicians in the ACO group. Each ACO must serve a minimum of beneficiaries. Beneficiaries will still have the freedom to seek care from providers outside of their assigned ACO.

In the initial three-year term, the ACO may elect to operate under a one-sided shared savings model (Track 1), in which the ACO is not responsible for any portion of costs in excess of the benchmark for the first two years. In year three, the ACO must transition to a two-sided risk model (Track 2), in which the ACO shares in both the savings and the losses. ACOs may elect to participate in Track 2 for all three years of the agreement and be eligible for higher sharing rates than under Track 1. Under either model, 25 percent of the ACO’s share of the savings will be withheld to ensure repayment of any losses. Failure to complete the three-year agreement will result in a forfeiture of any savings withheld.

In order to qualify for the additional payments, an ACO must exceed its minimum savings rate. The minimum savings rate is scaled based on the number of beneficiaries assigned to the ACO but ranges from 3.9 percent for a 5,000-beneficiary ACO to 2.0 percent for a 60,000-plus-beneficiary ACO. The maximum shared savings payment is 7.5 percent under Track 1 and 10 percent for Track 2.

The proposed regulations summarize the ACO governance structure and application requirements.

  • An ACO is a provider-driven legal entity (corporation, partnership, limited liability company, foundation, or other entity permitted by state law) constituted for the purposes of receiving and distributing shared savings, repaying shared losses, reporting, and compliance.
  • The ACO must maintain a shared governance with all ACO participants (Medicare-enrolled entities that directly provide health care services), and the governing body must include a Medicare beneficiary representative.  
  • ACO participation is not limited to primary care physicians, although it must have a sufficient number of primary care physicians to generate an assigned group of 5,000 or more Medicare beneficiaries. Eligible ACO participants must have a meaningful commitment to the ACO’s clinical integration program and may include Medicare-enrolled professionals in group practices, networks of individual practices of professionals, joint venture arrangements between hospitals and professionals, hospitals employing professionals, and other providers and suppliers.  
  • ACO participants must maintain control over at least 75 percent of the ACO governing body to discourage ACO control by private, third-party management companies.  
  • An ACO must also do the following:  
    • Have leadership that includes an executive manager who serves at the will of the board and a board-certified physician to serve as the full-time medical director of the ACO who is physically present in an established ACO location
    • Demonstrate that it has a compliance plan with a designated compliance official who is not legal counsel to the ACO and who reports directly to the ACO’s governing body
    • Maintain clinical and administrative systems to support initiatives to improve quality and reduce unnecessary services, and utilize health information technology that enables the ACO to collect and evaluate data and patient care surveys and other quality and utilization measures
    • Adopt a patient-centered focus that is integrated into practice by leadership and management working with the ACO’s health care teams and that addresses coordination of care for Medicare beneficiaries
  • ACOs will be monitored by the Centers for Medicaid & Medicare Services (CMS) for activities that appear to be avoidance of at-risk patients.

The proposed regulations also include documentation requirements for governance materials, policies to promote evidence-based medicine and clinical practice, policies to promote beneficiary engagement (with HHS pre-approval of all ACO marketing materials), a conflict of interest policy, and other written standards and notices. The proposed regulations were published concurrently with the following:

  • A notice and comment period from CMS and the HHS Office of Inspector General (OIG) jointly outlining proposals for waivers of certain federal laws—the physician self-referral law, the anti-kickback statute, and certain provisions of the civil monetary penalty law—in connection with the Shared Savings Program  
  • A joint statement from the Federal Trade Commission and the U.S. Department of Justice titled “Proposed Statement of Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program” (Antitrust Policy Statement)  
  • A notice from the Internal Revenue Service requesting comments regarding the need for guidance on participation by tax-exempt organizations in the Shared Savings Program through ACOs  

In Notice 2011-20, the IRS assured tax-exempt organizations that participation in an ACO with for-profit entities will not jeopardize the organization’s tax- exempt status or result in unrelated business income tax if the terms of the organization’s participation are set forth in writing in advance and proportionate to its capital investment and effort.